Wednesday, April 30, 2008

McCain's Health Care Plan

UPDATE: For a short and easy to understand description of the problems with McCain's health care plan, I recommend you read this column by economist Paul Krugman.

McCain gave a speech on his health care plan yesterday which said very little. In this NY Times article, McCain's economic advisor Holtz-Eakin makes it clear that their political strategy is to avoid getting tied down on any details, so that the glaring flaws in the plan won't be quite so obvious.

Let's start with the one hard proposal McCain has made: he would tax employer-sponsored health insurance and create new tax credits--$5000 for a family and $2500 for an individual--for people who buy their own insurance. As Holtz-Eakin made clear in the talk I attended last month, this means that workers would have to pay taxes on the value of health benefits they received from employers. This is explicitly an attempt to kill the existing system of employer-provided care by dramatically increasing taxes on workers.

How would this work out for the typical worker? Consider this information from the most recent Kaiser Family Foundation study of health care costs:

In 2007, for a family the average total premium for a health care plan was $12,106, with $8824 paid by the employer. Let's say the McCain plan is enacted. What would happen to that average family if the employer continued to provide coverage (Scenario 1)? For a married couple filing jointly with income $63K-128K, the marginal tax rate is 25%, so they would face a tax increase of $2406 (25% of $8824).

But of course the intent of the McCain plan is to kill the employer-provided system. So let's say the McCain program is adopted and your employer drops your family's coverage (Scenario 2). What would happen? You would now have to foot the complete $12,106 bill for coverage, a $8825 increase over the employee-portion you're currently paying. This would be offset by a $5000 tax credit. So net, you would end up paying $3325 ($8825-$5000) more for your health care.

So, remarkably, McCain has managed to design a heads-you-lose, tails-you-lose program. Either your employer keeps your coverage, in which case you face a huge tax increase. Or your employer drops your coverage, and you face an even more massive increase in your out-of-pocket health-care costs.

The best-case scenario would be that employers who dropped coverage would then increase wages, compensating workers for the jump in what they have to pay for health care. In the long-run, there's a fair case to be made that this would happen, but as Keynes famously remarked, "In the long run, we're all dead," and the transition period would be extremely painful.

Strangely, although the plan is plainly an attempt to deep-six the employer-provided system, according to the NY Time article, "Mr. Holtz-Eakin said he believed that many employers would still offer health insurance to try to attract the best workers ..." If that's right, these workers would face a huge jump in their tax bill (see Scenario 1 above).

None of this gets to the key problem in McCain's plan: on the individual market, people with pre-existing conditions would be denied coverage. Here's the relevant part of the Times article:

Mr. McCain had previously described aspects of his health care plan but on Tuesday offered new details on how to cover people with existing health problems, in a nod to the growing concerns about the difficulties that many sick, older and low-income people have getting insurance.

Elizabeth Edwards ... recently pointed out that both she and Mr. McCain could be left uncovered by Mr. McCain’s plan because she has cancer and he has had melanoma. Stung by such criticism, Mr. McCain is trying to develop a way to cover people with health problems while still taking a generally market-based approach to solving the health care crisis.

“I’ll work tirelessly to address the problem,” Mr. McCain said in a speech here at the H. Lee Moffitt Cancer Center & Research Institute. “But I won’t create another entitlement program that Washington will let get out of control. I won’t do it. Nor will I saddle states with another unfunded mandate.”

For people who currently get health insurance through their jobs, Mr. McCain’s plan would give them a tax credit that they could put toward buying a different, and potentially less expensive, health insurance plan tailored to their needs — and allow them to keep that health plan, and their doctors, even if they switch or lose their jobs.

But Democrats and some experts said the proposal might lead some employers to stop offering health insurance, and questioned whether the tax credit would cover the cost of private insurance ....

Mr. McCain’s speech here implicitly acknowledged some of the shortcomings of his free-market approach. But rather than force insurers to stop cherry-picking the healthiest — and least expensive — patients, Mr. McCain proposed that the federal government work with states to cover those who cannot find insurance on the open market. With federal financial assistance, his plan would encourage states to create high-risk pools that would contract with insurers to cover consumers who have been rejected on the open market.

Mr. McCain was vague Tuesday about just how his safety net would be structured, and did not specify how much it might cost, leaving the details to negotiations with Congress and the states. But his top domestic policy adviser, Douglas Holtz-Eakin, said in an interview that the federal share could cost between $7 billion and $10 billion — money he said could be redirected from existing federal programs that pay for uncompensated medical care, mainly in hospitals.

Mr. Holtz-Eakin said that sum, when combined with contributions expected from the states and insurers, could provide coverage for the five million to seven million uninsured people that he estimates cannot obtain it because of their health or age.

These figures are nonsense on their face. If the federal government is going to subsidize a high-risk pool of 5-7 million people with $7-10 billion a year, the proposed subsidy is $1400 year. There is no way to this is going to be anywhere close to covering the extra insurance costs for a group that consists of old and sick people. Although McCain intentionally leaves out the details, the only place these extra funds could come from is from the states. In other words, although McCain says, "Nor will I saddle states with another unfunded mandate,” this is exactly what his plan would do.

Additionally, the 5-7 million is surely a vast underestimate of the number of people who would not be able to obtain health insurance in McCain-land. Anyone old, sick, or with a prior condition--a number that would easily be in the several tens of millions--would not be able to obtain insurance at anything other than obscene rates. Faced with no restrictions, insurers would cherry pick only the low-risk customers.

Overall, the McCain plan would raise taxes on workers in an effort to eviscerate the current health care system in the name of free market idolatry. To the extent it fails to completely destroy the existing system--as McCain's advisor anticipates--it would saddle the average family with $2400 in extra taxes to penalize them for having employer-sponsored care. And if the McCain plan succeeded in killing the current system, it would leave tens of millions unable to buy any care, until he comes up with some new safety net, details to be provided later, i.e. never.

UPDATE: It's now less clear to me that the credit would not be available to those with employer-based coverage. See this post and in particular my additional discussion in comments.


shinoyan said...

Please link with me who had a look at a wonderful site mutually. http: //

Dallas Health said...

What are the various types of health insurance programmes that are available to me, and which is best suited to suit the needs of my family and myself? How do I choose the ideal health care plan? What are the major points that one needs to bear in mind while buying Health Care Insurance Policy?

H.S. Yeh said...

I am generally an Obama supporter, but both candidates are decidedly iffy on the costs of their health care proposals. Biggest issue is who is covered and who is not. Obama says for all. But what about the 11M uninsured who are undocumented workers. McCain says he'll fund Guaranteed Access Plans for the people his plan leaves behind. But how much will he fund?

All of these are interesting points. HealthDecision '08 is a site that delves into some of these issues. After going through them, you can then "vote" on a plan:

HealthDecision ’08: Obama & McCain on Health Care

Thanks for your article!

Rebecca said...

You mention that families with employer provided health insurance would face an extra $2400 in taxes, but that's why McCain offers them $5000 in a refundable tax credit. Most people will break even or even get a little bit back into their HSA's... Yes, if your employer drops your coverage then someone will probably have to pay a bit more. At the same time, money in our hands will encourage better health management. Check out:

Thomas said...

From what I would understand you would still get the $5000 tax credit in scenario 1 and thus you would wind up pocketing the difference between the credit and the added tax... which doesn't sound so bad obviously.

Donny said...

" credits would not put a significant dent into what a family must pay to buy health insurance on their own. The average cost of providing health care for a family of four annually is more than $12,000, according to the Kaiser Family Foundation."

Donny said...

"Some years in the future, the tax credit may not be substantial enough to make up for the increase in taxes. "Over time, an increasing number of workers will end up paying [more] in higher taxes ... than they will receive in federal assistance through the tax credits," Thorpe told us. "This occurs because the average premiums for employer-sponsored health insurance increase much faster than the health tax credits." (The McCain campaign says the credit will be indexed to the Consumer Price Index.)"

doc Steve said...

I think the biggest issues with the McCain plan are 1) will employers give employees the wage increase? Would an entry level employee making $35,000 a year revieve a $10,000 wage increase (a30% raise)? Does the company YOU work for seem that magnanamous?
2) Big companies like 3M, GM, Medtronic, etc. have purchasing power to negotiate a discounted premium. So the $12,000 annual premium is a discounted premium. To get the same coverage as an individual, it will cost more.
3) And what about pre-exsisting conditions? (Diabetes, high blood pressure, pregnancy to name a few) New employees at large companies are not excluded based on pre-existing conditions, the just enter the 'pool.'
VP-elect Palin, with a child with Down Syndrome would pay a substantial premium increase, (and might not even be able to purchase a family insurance plan on her own),IF she was not part of a large group plan (ie Alaska State government plan)
There is nothing in the McCain proposal about regulating this standard insurance practice.

sewaneepat said...

Actually, people who subscribe to or are eligible for health insurance through their work place do not receive the tax credit.

Rebecca said...

The CNN article is incorrect. The tax credit is for everyone. McCain has said that multiple times. Check out this recent policy briefing. While the cost of health insurance for a family of four is 12,000... McCain banks on the fact that if you control your own healthcare dollars, and allow for greater competition, you will reduce costs. For most people, the tax credit would be enough to cover their insurance. Not for everyone, but then again... I've not seen a perfect fix for the solution yet.

Don Pedro said...

Thanks to everyone's attempts to solve this mystery. I have yet to find an unambiguous statement from McCain saying whether or not people could claim the credit if they have health insurance through their employer.

Since on a number of issues, McCain and his advisers have been at odds in their descriptions of basic issues, I am very reluctant to interpret his position based on a third party's guess.

Rebecca: You say McCain has explained his position clearly multiple times. Can you point one out to us?

Doc Steve: You have a very good point that under the logical result of the McCain-Palin plan Palin herself probably wouldn't be able to obtain insurance.

Rebecca said...

From John McCain's Website:
"While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance."

From John McCain's Des Moines Speech:
"I believe that everyone should get a tax credit of $2500, $5000 for families, if they have health insurance. It is good tax policy to take away the bias toward giving workers benefits instead of wages. It is good health policy to reward having insurance no matter where your policy comes from."

"McCain said Tuesday he would offer families a $5,000 (€3,200) tax credit to help buy insurance policies. Everyone would get the credit, whether he or she keeps a policy through an employer or shops for a new one."

"Sen. John McCain's,R-Ariz., health-care plan would replace the existing tax exclusion employer-sponsored coverage with a refundable tax credit for all Americans."

"A key provision is providing tax credits of $2,500 to individuals and $5,000 to families as an incentive to help them buy insurance. All people would get the tax credit even if they get insurance through work or buy it."

"McCain, the presumptive GOP presidential nominee, wants everyone to get a tax credit to either buy insurance or offset the taxes on health care coverage obtained through work. The Arizona senator says variety and competition will help bring down costs."

barrymcgrath said...

The point most people seem to be missing is insurance companies do not deny coverage to only sick people. Insurance companies refuse individual policies at the standard rate for almost anyone.
I was denied a standard policy by every insurance company I tried because of my chronic condition - I take blood pressure pills. I was told that anyone with an ongoing prescription for anything is considered "high-risk." My 29 year niece was denied the standard policy because she once had asthma.
Corporate policies are negotiated by HR professionals with years of experience who have the weight of the entire corporate buy behind them. What chance do you, as an individual have of getting an equal deal?

Donny said...

Rebecca says -- "While the cost of health insurance for a family of four is 12,000... McCain banks on the fact that if you control your own healthcare dollars, and allow for greater competition, you will reduce costs."

So when my kid gets cancer. I should tell him to reduce his sickness so that I don't spend to much money on health care costs.


So he's basically saying your screwed unless you have 5,6 or 7 seven homes.

Rebecca said...


I absolutely agree: McCain does not provide enough detail on how he would insure people with pre-existing conditions. He says in his plan he would work with governors to develop a guaranteed access plan. “One approach would establish a nonprofit corporation that would contract with insurers to cover patients who have been denied insurance and could join with other state plans to enlarge pools and lower overhead costs.” I’m skeptical.


I’m not advocating for or against McCain. I’m just telling you what I know. McCain believes in market competition. He doesn’t say that if a child gets cancer, he should reduce his sickness: he says that if we’re allowed more choices, we’ll have lower costs and better options.

I like the passion though- people should get fired up about healthcare.

Anonymous said...

In our current situation, my wife and I receive a health benefit of about $8400 a year. Our tax rate should be about what the Kaiser foundation calculated about $1300. But would Flex Plans be eliminated as well since I flex the remaining $4000+ for our family health plan? If so the $3700 net from the credit wouldn't really cover the remainder and we at least would go backward even in the first couple of years.

Also the $5000 is scheduled to be increased according to the Consume Price Index not by the true inflation rates of health care or health insurance, so within just a few years most of us will be going backwards.

I have to think down the road 10 to 15 years not just a couple in my budget.

private health insurance specialist said...

In our current economic situation mccain would find it difficult with this kind of program..

Anonymous said...

good job

Steven said...

My mother is currently in her second battle against cancer. If McCain's health care plan is put into action, and his employer stops covering them, they will have to shop for their own health insurance. No insurer will cover somebody who already has cancer, especially for the small amount of $5,000. It's scary to think that they will be on their own, with no possible way of paying for her treatment. Consider this when you vote, because health determines the quality of your life, and it could be you or your loved one left with no coverage when it's needed the most.

Anonymous said...

You are way off on what McCains plan is. Quit being so liberal

Donny said...

I love that some people think that being liberal is such a bad thing or they use liberal as a bad word.

The definition of Liberalism is "a broad class of political philosophies that consider individual liberty to be the most important political goal." Liberalism emphasizes individual rights and equality of opportunity.

If THAT doesn't sound American than I don't know what does.

low cost insurance said...

One economist predicted that if a national health care plan was instituted by the feds it would bankrupt the U.S. I think that's what many are concerned about, the affordability of it all. They just gave AIG another 40 billion or so. Somewhere along the line, all that money needs paid back.